What is Transfer Pricing?
Transfer pricing refers to the pricing of goods, services, and intangibles transferred between related entities within a multinational group. These transactions must be priced as if they were conducted between unrelated parties, a principle known as the “arm’s length” standard.
Transfer pricing regulations, set out under Section 31 of the Income Tax Act, ensure that SARS can adjust prices that appear artificially manipulated to shift profits and reduce tax liabilities. These adjustments can result in significant additional tax assessments, interest, and penalties.
The Purpose of ITA88 in Transfer Pricing
ITA88 empowers SARS to collect outstanding taxes by appointing third parties—such as banks or customers—to pay amounts due directly to SARS. This tool was designed to improve tax collection efficiency when taxpayers fail to meet their obligations. However, it is increasingly being used in transfer pricing contexts, particularly when SARS disputes the pricing of intercompany transactions.
When SARS issues a transfer pricing adjustment under Section 31 and the taxpayer does not pay the assessed tax, ITA88 allows SARS to bypass the taxpayer and go straight to third parties for payment—even if the taxpayer is in the middle of a formal dispute process.
How ITA88 and Section 31 Work Together
The interaction between Section 31 and ITA88 is what creates the most risk for taxpayers. If SARS concludes that a taxpayer’s intercompany pricing is not at arm’s length, it can adjust the taxable income accordingly. Should the taxpayer not settle the adjusted amount, SARS may issue an ITA88 notice to a third party without waiting for the objection or appeal process to conclude.
This creates a situation where taxpayers might find themselves facing enforced collection while still actively disputing the underlying tax liability—a scenario that can cause operational and cash flow disruptions.
ITA88 in Practice: Third-Party Appointments
When invoking ITA88, SARS is authorised to issue a “third-party appointment” to entities such as banks, employers, or clients of the taxpayer. This legally obliges the third party to divert funds that would have gone to the taxpayer and pay them to SARS instead.
The process requires no court order and is executed swiftly, often catching businesses off-guard. The only recourse is to demonstrate that the tax is under dispute and apply for a suspension of payment under Section 164. However, unless granted, SARS may proceed with the ITA88 action regardless of any pending objections or appeals.
Impact on Multinational Corporations
MNEs operating in South Africa need to be particularly vigilant. The broader use of ITA88 by SARS means that even large, sophisticated organisations can find themselves subject to sudden fund seizures. This is especially relevant given the increased scrutiny SARS places on transfer pricing documentation and the growing volume of cross-border transactions.
In the 2023/24 fiscal year, SARS intensified its focus on compliance enforcement, collecting over R28 billion in back taxes. A notable portion of this effort targeted large businesses, particularly in areas of international tax compliance and transfer pricing.
Strategies to Prevent ITA88 Enforcement
The best defence against unwanted ITA88 action is proactive compliance. Multinational groups should ensure their transfer pricing policies are in line with OECD guidelines and that they maintain contemporaneous documentation for all material intercompany transactions.
Additionally, businesses should consider entering into Advance Pricing Agreements (APAs) with SARS, which can provide long-term certainty and protection against future audits and adjustments. Robust internal policies, proper contract management, and timely reporting are also essential.
Legal Recourse and Managing Disputes
If an ITA88 notice is received, taxpayers can challenge the appointment, especially if they are disputing the underlying tax. The key step is to request a suspension of payment and ensure that all objection and appeal processes are properly lodged within SARS’s timelines.
Legal recourse may also be available if SARS has not followed due process or if the third-party appointment causes irreparable harm. However, it is important to act quickly, as the enforcement powers under ITA88 are broad and often immediate.
As SARS continues to intensify its tax collection efforts, the strategic use of ITA88 in transfer pricing cases represents a major compliance risk for multinational businesses. The fusion of Section 31 transfer pricing adjustments with ITA88’s enforcement powers creates a complex challenge—one that can have real financial and operational consequences.
Businesses must take a proactive stance. Ensuring robust transfer pricing documentation, engaging in regular internal reviews, and understanding the legal remedies available under the Income Tax Act are all essential to minimising risk.
If your organisation is concerned about the implications of ITA88 or facing challenges related to transfer pricing enforcement, we encourage you to speak with us at DCM Corporate. Our team of experts is equipped to guide you through these complexities and ensure your business is protected.